Why did all the money and sacrifice fail to heal the Greek economy? A look back recounts what’s gone wrong.
FRANKFURT, Germany — After two bailouts totaling 240 billion euros ($266 billion) and six years of depression, spending cuts and lost jobs, Greece teeters on the edge of collapse.
How did it come to this? Why couldn’t all that money and all that sacrifice turn around a country that makes up less than 2 percent of the 19-country eurozone economy?
On Sunday the country is holding a referendum on whether to accept the tough creditor conditions attached to loans needed to avoid default and a banking collapse.
A no vote may lead to a chaotic departure from the shared euro currency. Even a yes vote is no guarantee the creditors will agree to lend.
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Here are seven things that helped Greece get into today’s mess:
The credit binge
There is no way around it: Greece engaged in a three-decades-long credit binge starting in the early 1980s, spending the money on plush government jobs for supporters of the country’s two major political parties: the center-left PASOK and center-right New Democracy. Taking turns in office, they paid their followers well, driving up private-sector wages and making Greece a costly place to do business. The parties also looked the other way on widespread tax evasion. Independent professionals — including doctors and lawyers — often reported less income than factory workers.
The euro arrives
Despite its rickety finances, Greece shaped up a little for a few years and qualified to join the single currency in 2001. It was a time of euphoria and confidence in the euro, seen as a rival to the dollar as a global currency. New members were desired to boost the European Union’s biggest hope for European integration. Greece was waved in, and promptly went back to its old ways.
Let the good times roll
The arrival of the euro fueled the debt binge. German and French banks found they could now buy Greek government bonds in euros, not drachmas that might devalue. Greece borrowed at what in retrospect were ridiculously low interest rates, just a bit more than those charged to rock-solid Germany. They were in the euro, the thinking went, so what could go wrong?
In October 2009, after the global financial crisis had made investors more wary of risk, Greece revealed its deficit was far higher than advertised and its finances were out of control. Its borrowing costs shot up. It couldn’t pay.
When the party ended, Greece got a 110 billion euro bailout (about $145 billion at the time) in 2010 from the other eurozone countries and the International Monetary Fund (IMF). The creditors attached tough conditions to cut spending and deficits, and to tackle the rampant bureaucracy and corruption. Yet the cuts quickly undermined growth, which fell below the optimistic estimates of the creditors, who miscalculated how much they would weigh on the economy.
There was a contradiction that couldn’t be resolved: cuts in public spending were needed to reduce Greece’s cost base because it couldn’t devalue. Yet the lower public spending pushed down GDP and simply made the debt burden bigger compared with the size of the economy.
Unemployment soared. Misery multiplied.
Handcuffed by the euro
With its own currency, Greece could have defaulted on its debts and devalued, quickly erasing its international cost problem, and moved on within a few years. Cutting wages and prices is tougher, and takes longer. In that sense, the euro has prolonged the agony.
Taxpayers on the hook
By 2012, it was clear the first bailout wasn’t doing the trick. A second rescue included sticking Greece’s private creditors with losses on their bonds, along with more loans. Yet creditors continued to underestimate how much damage austerity would do to growth. The debt level, measured as a fraction of the economy, continued to increase. Even at the time of the deal, most economists and policymakers expected that further debt reduction or easier terms were inevitable.
But the reshuffle of Greece’s debt meant that instead of owing bond investors, Greece’s creditors were now European taxpayers, the IMF and the European Central Bank (ECB). With taxpayers on the hook, resistance to further debt relief stiffened in places such as Germany, the Netherlands, Austria and Finland.
For a while it looked like the second bailout might do the trick. The Greek government under Prime Minister Antonis Samaras narrowed deficits. Some reforms were implemented, while others were passed but didn’t take effect. The economy bottomed out, after an agonizing fall of about 25 percent, and appeared ready to start growing. Greece did get some easier terms on interest and time to pay.
Close, but no cigar
In September 2014, Greece had only weeks left before it successfully completed the second bailout and transitioned to milder forms of assistance. Approaching the finish line, Samaras stumbled.
He said Greece would expel its hated creditor monitors and return to bond markets without outside help or advice. The idea fell flat. Interest yields rose sharply on its remaining debt. Instead of getting the last of the bailout money, in December the floundering Samaras had to call an early election, held in January.
Voters, who were fed up with years of agony, chose Syriza, a hard-left party that won support with its demands for debt reduction and no more austerity. Creditors balked.
Uncertainty quickly tanked the fledgling recovery. The bailout was first extended and then allowed to expire Tuesday as Syriza and creditors talked past one another.
The last bailout money, some 7.2 billion euros (about $7.9 billion), had slipped out of Greece’s grasp. And with it, perhaps, its chance of remaining in the eurozone.